Devangshu Datta: Weak data indicate delay in consumption recovery

December PMI is at 49.6, the worst decline in manufacturing since Nov 2008

Some high-speed data from post-demonetisation has started coming in. The December manufacturing Purchasing Managers' Index (PMI) indicates contraction. Automobile numbers show drastic falls. Crop sowing data and core industry data (from November) also shows slowdown.

The November manufacturing PMI was at 52.3 (above /below 50 signals expansion/ contraction), which was much lower than the October PMI of 55.4 but still positive. The December PMI is at 49.6, which means contraction. It's the worst decline in manufacturing since November 2008.  

The Services PMI crashed to 46.7 in November 2016 itself, in a sharp contraction from the expansionist 54.5 recorded in October 2016. Similar contraction is expected in December Services PMI, which is due to be released soon.

The core 8-sector index contributes about 38% of weight to the Index of Industrial Production (IIP). In November, the core sector saw slowdown. Growth hit 4.9% year on year, compared to 6.6% year on year (y-o-y) in October 2016, and 5.1% y-o-y in September 2016. The IIP for November 2016 will be released in mid-month.

IIP and core sector data are tricky to adjust for the festival season due to base effects. Diwali-Dussehra both fell in October 2016. The festival month of October 2016 saw low production due to holidays. In 2015, Dussehra was in October, while Diwali was in November. Hence, October 2016 saw overall IIP drop by 1.9% versus October 2015, despite a core sector surge of plus 6.6%.

Normally, November 2016 should see IIP rise, since there was no festival versus the lower-base of November 2015, which had one festival. However, if core sector has seen growth slowdown, there may be a contraction in IIP for November 2016 as well. Incidentally, IIP was at 184 in December 2015 and down to 178 in October 2016 implying there was some contraction through the pre-demonetisation 10-month period.

Crop sowing data shows decline. On November 11, Ministry of Agriculture data said Rabi sowing (sowing of many crops starts early October) was up 15.7% y-o-y.  December 30 data says rabi sowing is up by only 6.9% y-o-y, indicating decline post-demonetisation. Rice sowing began mid-November, and rice sowing is down y-o-y to 1.07 million hectares in 2016, from 1.48 million hectares in 2015.

Automobile sales data indicates a slump of scary dimensions. In December, Hero Motors saw 34% contraction in terms of dealer despatches. Bajaj Auto saw 22% total decline in despatches (this includes commercial vehicles and 27% decline in exports). TVS was down nine%. Maruti Suzuki saw four% dip in despatches and Hyundai reported a similar four% decline. Some samples of vehicle registration data cited by brokerages indicate that new registrations in several states were down by a third in December.

Some contraction was expected and discounted. Hero is down by 7% in the past month, while Bajaj Auto is down by 4.5%. But, Maruti is still trending higher by about 6% and Mahindra &Mahindra is also still ahead by about 3%. The Nifty is trading at the same levels as early December. Has this crash been discounted? The problem is, nobody knows if deferment of consumption will continue indefinitely. Investors are just hoping Q3 can be written off with a quick recovery in demand.  

However, the crop data, which doesn't directly impact the stock market, will be ignored by most analysts. But, lower food production will make a big difference to rural well-being, months down the line. It may well result in sudden food-inflation in urban India as well. That could cramp consumption for the long-term.

The author is a technical and equity analyst